Taxing Issues: Ed Loughrey

Well as Roseanne Roseannadanna (Gilda Radner), that great reporter from Saturday Night Live, would say, “If it’s not one thing, it’s another.”

That’s exactly what is going on in today’s discussion of tax loopholes. All we have been hearing recently is what the oil companies are getting in the way of tax “subsidies.”

For the past few weeks, this column has been centered on what an individual taxpayer is doing to reduce his tax liability. Being all legal, we could identify with it and it seemed to be OK. But when it becomes part of major companies’ financial transactions, we seem to react differently.

When gas prices start to rise, blame is put on Big Oil for gouging and ultimately not paying income taxes. I can’t comment on the price of gas, but this discussion will center on the tax expenses that are being claimed.

This essay is no way an endorsement of the tax advantages received, just a reporting of the facts.

The “subsidies” that are being deducted are similar to the accelerated depreciation or first-year expense used in other industries and by individuals. Rather than capitalizing the costs of exploration and development fees, companies are allowed to deduct them on a current basis.

The oil companies believe that they are entitled to the same privileges that the pharmaceutical firms receive in their tax treatment of research and development of drugs and medicines. But that is not the final plan that the oil companies utilize.

They create off-shore subsidiaries in the Caribbean, and therefore are not subject to U.S. tax. It is not that they do not pay any income tax; it is that they pay tax to the host country and not to the good old U.S. of A.

As per the current law, any payments made to foreign countries in the way of tax becomes a credit on a dollar-for-dollar basis against any U.S. tax. The companies are being accused of making royalty payments to the foreign governments and calling them “taxes.” There is a bill being introduced right now to do away with this and other tax advantages.

The amount being reported as tax breaks in the oil industry is about $4 billion per year. When the total deficit for this year is hovering about $1.4 trillion, these subsidies are not very significant and eliminating them will not balance the budget.

A report was released by Big Oil stating that even though they are earning record profits, it computes out to be 7 cents per gallon. In the meantime, they pay more than 70 cents in excise and state taxes per gallon. If the law was changed, the income tax required will be passed down to the consumer while the corporations would only act as a collecting agent .

Many other companies besides Big Oil do not pay U.S. income taxes. The world’s largest corporation, “Big Electric” has set up leasing companies in tax haven countries as an example. Therefore the $9 billion in earnings are paid as rent and the result is no tax. Ironically, they are eligible for a $3.2 billion tax credit.

Since the law is what it is, and the corporate rate of 35 percent on net income is the highest in the world except Japan, this will remain. Management has stated that it has an obligation to its shareholders to make as much profit as possible so dividends can continue during this period of economic downturn.